U.S. Bonds Drop as Japanese Growth, Falling Dollar
Spur Inflation Concerns
By Wes Goodman
U.S. Bonds Fall; Dollar, Oil, Add Inflation Concerns (Update1)
(Adds information on prices and trading at end.)
New York, Sept. 9 (Bloomberg) -- U.S. government bonds fell
as a tumbling dollar, a rise in crude-oil prices and unexpected
economic growth in Japan fanned concerns that consumer prices may
pick up pace.
``It all adds up to more inflation,' said Mark MacQueen,
who has been selling Treasuries and buying safer money-market
securities for the $550 million debt portfolio at Sage Advisory
Services Ltd. in Austin, Texas. ``There's a good chance the
Federal Reserve will raise interest rates again' to combat it.
The 30-year bond fell 3/8, or $3.75 per $1,000 security, to
a price of 100 13/32. Its yield rose 2 basis points to 6.09
percent. Yields on two-year notes climbed 3 basis points to 5.68
percent.
Treasuries fell as investors fretted the dollar would extend
today's 3.2 percent drop against the yen to a three-year low of
107.60 yen. A falling currency can spur inflation by making
imports more expensive. Investors got another whiff of inflation
when crude oil, used to make everything from gasoline to plastic
bags, climbed to its highest price in 2 1/2 years.
Signs of economic growth fueled concerns about rising prices
even more. Claims for unemployment insurance in the U.S.,
measured by their four-week moving average, held below 290,000
for a fifth week. That hasn't happened since the end of 1973.
In Japan, the economy grew 0.2 percent in the April-June
quarter from the first quarter, the government announced today.
Economists surveyed by Bloomberg News expected a 0.3 percent
decline.
Many investors say improving economic growth in Asia and
Europe may lead to higher prices for goods and services globally.
Bond investors hate inflation because it erodes the value of
their fixed interest payments.
Inflation `Imminent'
``Inflation is going to show up,' said Todd Finkelstein,
who helps oversees $425 million at Advest Group Inc. in Boston.
``It's imminent.'
Finkelstein, who expects the Fed to raise rates by 25 basis
points at its next meeting Oct. 5, has been selling Treasuries to
buy investment-grade corporate bonds, gaining some protection
against inflation in their higher yields.
The Fed already raised its target for overnight bank lending
-- the federal funds rate -- by 25 basis points on June 30 and
Aug. 24, bringing the rate to 5.25 percent.
Hisashi Takahashi, a fund manager at NCB Investment
Management Co., which oversees 650 billion yen ($5.9 billion) in
assets, said his company cut its holdings of Treasuries by about
3 percent in the past month. It shifted that money to European
assets, he said.
Takahashi expects the 30-year Treasury yield to range
between 5.75 percent and 6.25 percent over the next three months.
Fed Rates
Federal funds futures contracts, which signal where
investors expect the fed funds rate to be in the weeks and months
ahead, suggest a camp of investors expect another increase this
year.
The implied yield on the contract for December delivery rose
2 basis points to 5.42 percent, 17 basis points above the current
fed funds target, a sign that some investors see another rate
increase by the time the contract expires.
The latest report on consumer prices, the most-watched
inflation gauge, shows costs rose 2.1 percent in the 12 months
ended in July, up from gains of just 1.6 percent in 1998.
To be sure, this measure has been under 2.5 percent on a
year-over-year basis for the last 27 months.
Fed officials refrained from stoking rate concerns today.
William McDonough, president of the Federal Reserve Bank of New
York, speaking in Buffalo, said the American ``productivity
boom' will probably continue. High worker productivity has
helped keep inflation low, analysts say.
Fed Governor Roger Ferguson, speaking in Washington, said
inflation is ``well contained.' Both men downplayed the impact
of the weaker dollar on the U.S. economy.
Corporate Bonds
Bonds were also held back as corporations scheduled some $5
billion of debt sales, which will offer investors a higher-
yielding alternative to Treasuries.
Procter & Gamble Co., the largest U.S. maker of household
products, including Tide laundry soap and Crest toothpaste, sold
$1 billion of 10-year notes yielding 98 basis points more than
the 10-year Treasury rates.
AT&T Corp., the largest U.S. long-distance phone company,
issued $450 million of three-year notes.
Duke Capital, part of Duke Energy, an electric utility based
in North Carolina, plans to sell $1 billion of global notes.
Arcadia Financial Ltd., an auto financier, plans to sell
$600 million of auto-loan backed bonds, adding to $1.47 billion
of asset-backed securities already slated for this week.
Bankers said investment-grade debt sales could run about $6
billion to $11 billion a week. Investment-grade sales averaged
about $11.5 billion a week so far this year, though the pace was
slower in August.
Prices, Trading
At today's 5.96 percent, U.S. 10-year debt yields 411 basis
points more than the 1.85 percent yield on the most current 10-
year Japanese bond, 1 basis point more than a week ago.
Ten-year Treasuries yield 91 basis points more than the 5.05
percent yield on 10-year German bonds, 8 basis points less than a
week ago.
The basis, which reflects the difference between the current
30-year bond and the December futures contract adjusted for a
conversion factor, was little changed at 353/32, or 11 1/32
points.
Yields on three-month bills fell 1 basis point to 4.79
percent on a bond-equivalent basis. Yields on six-month bills
fell 1 basis point to 5.13 percent, while one-year yields rose 3
basis points to 5.27 percent.
About $42.7 billion of Treasury securities traded through
most of the major bond brokers by 3 p.m. New York time, according
to GovPX Inc., which supplies market information. That's 40.8
percent less than the average Thursday in the third quarter of
1998 and 10.2 percent less than the average Thursday in the past
month, according to GovPX.
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